Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended APRIL 4, 2004
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-17827-01
ISP CHEMCO INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0382622
(State or other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
300 DELAWARE AVENUE, SUITE 303, WILMINGTON, DELAWARE 19801
(Address of principal executive offices) (Zip Code)
(302) 427-5818
(Registrant's telephone number, including area code)
NONE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
-----------------------------------
SEE TABLE OF ADDITIONAL REGISTRANTS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes / / No /X/
As of May 18, 2004, 100 shares of the registrant's common stock (par value
$.01 per share) were outstanding. There is no trading market for the common
stock of the registrant. As of May 18, 2004, each of the additional registrants
had the number of shares outstanding which is shown on the table below. There is
no trading market for the common stock of the additional registrants. No shares
of the registrant or the additional registrants were held by non-affiliates.
THE REGISTRANT AND THE ADDITIONAL REGISTRANTS MEET THE CONDITIONS SET FORTH
IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND ARE THEREFORE FILING
THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
ADDITIONAL REGISTRANTS
Address, including zip
Commission File code and telephone
Exact name of registrant as State or other No. of No./ I.R.S. number, including area
specified in its charter jurisdiction of Shares Employer code, of registrant's
incorporation or Outstanding Identification No. principal executive
organization offices
- --------------------------- ---------------- ----------- ------------------ ------------------------
ISP Chemicals Inc. Delaware 10 333-70144-08/ Route 95 Industrial Area,
22-3807357 P.O. Box 37
Calvert City, KY 42029
(270) 395-4165
ISP Minerals Inc. Delaware 10 333-70144-07/ 34 Charles Street
22-3807370 Hagerstown, MD 21740
(301) 733-4000
ISP Technologies Delaware 10 333-70144-09/ 4501 Attwater Avenue
Inc. 22-3807372 and State Highway 146
Texas City, TX 77590
(409) 945-3411
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ISP CHEMCO INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
QUARTER ENDED
---------------------
APRIL 4, MARCH 30,
2004 2003
--------- ----------
(THOUSANDS)
Net sales........................................ $ 266,895 $ 232,576
Cost of products sold............................ (168,815) (152,593)
Selling, general and administrative.............. (49,151) (43,793)
Other operating charges.......................... - (1,451)
Amortization of intangible assets................ (72) (144)
--------- ----------
Operating income................................. 48,857 34,595
Interest expense................................. (13,602) (13,421)
Other expense, net............................... (1,693) (1,337)
--------- ----------
Income before income taxes and cumulative effect
of change in accounting principle.............. 33,562 19,837
Income taxes..................................... (11,689) (6,603)
--------- ----------
Income before cumulative effect of change in
accounting principle........................... 21,873 13,234
Cumulative effect of change in accounting
principle, net of income tax benefit of $600... - (1,021)
--------- ----------
Net income....................................... $ 21,873 $ 12,213
========= ==========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
1
ISP CHEMCO INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
APRIL 4, DECEMBER 31,
2004 2003
---------- -----------
(Thousands)
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 44,101 $ 56,426
Accounts receivable, trade, less allowance of
$5,819 and $5,848 at April 4, 2004 and
December 31, 2003, respectively.................. 116,497 86,921
Accounts receivable, other......................... 25,086 19,681
Receivables from related parties................... 15,693 12,508
Inventories........................................ 186,236 187,805
Deferred income tax assets......................... 25,598 25,701
Prepaid expenses................................... 6,628 5,777
--------- ----------
Total Current Assets............................. 419,839 394,819
Property, plant and equipment, net................... 583,117 580,608
Goodwill, net of accumulated amortization of $180,486 334,944 331,101
Intangible assets, net of accumulated amortization of
$1,222 and $1,150 at April 4, 2004 and
December 31, 2003, respectively.................... 19,369 8,866
Long-term receivable from related party.............. 32,598 32,116
Long-term loan receivable from related party......... 7,760 31,231
Other assets......................................... 60,627 57,479
---------- ----------
Total Assets......................................... $1,458,254 $1,436,220
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Short-term debt................................... $ 71 $ 68
Current maturities of long-term debt.............. 2,867 2,722
Accounts payable.................................. 64,265 54,615
Accrued liabilities............................... 71,390 89,023
Income taxes payable.............................. 29,645 33,263
---------- ----------
Total Current Liabilities....................... 168,238 179,691
---------- ----------
Long-term debt less current maturities.............. 651,501 620,473
---------- ----------
Deferred income tax liabilities..................... 128,552 117,819
---------- ----------
Other liabilities................................... 125,924 123,855
---------- ----------
Shareholder's Equity:
Common stock, $.01 par value per share;
1,000 shares authorized; 100 shares issued
and outstanding ................................ - -
Additional paid-in capital........................ 385,762 399,474
Retained earnings (accumulated deficit)........... - (4,354)
Accumulated other comprehensive loss.............. (1,723) (738)
---------- ----------
Total Shareholder's Equity...................... 384,039 394,382
---------- ----------
Total Liabilities and Shareholder's Equity.......... $1,458,254 $1,436,220
========== ==========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
2
ISP CHEMCO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
QUARTER ENDED
-------------------
APRIL 4, MARCH 30,
2004 2003
-------- ---------
(THOUSANDS)
Cash provided by (used in) operating activities:
Net income............................................. $ 21,873 $ 12,213
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Cumulative effect of change in accounting principle - 1,021
Depreciation....................................... 15,765 14,814
Amortization of intangible assets.................. 72 144
Deferred income taxes.............................. 7,070 2,568
Increase in working capital items...................... (37,719) (28,978)
Proceeds (repayments) from sale of accounts receivable. 2,877 (1,339)
Increase in receivables from related parties........... (3,667) (5,858)
Other, net............................................. 52 54
--------- --------
Net cash provided by (used in) operating activities...... 6,323 (5,361)
--------- --------
Cash used in investing activities:
Capital expenditures and acquisitions.................. (40,222) (9,655)
--------- --------
Net cash used in investing activities.................... (40,222) (9,655)
--------- --------
Cash provided by (used in) financing activities:
Increase (decrease) in short-term debt................. 3 (79)
Proceeds from issuance of debt......................... 31,188 -
Repayments of long-term debt........................... (692) (128)
Increase in loan to related party...................... (7,760) -
Debt issuance costs.................................... (850) -
Capital contribution from parent company............... - 1,451
--------- --------
Net cash provided by financing activities................ 21,889 1,244
--------- --------
Effect of exchange rate fluctuations on cash
and cash equivalents................................... (315) 1,424
--------- --------
Net change in cash and cash equivalents.................. (12,325) (12,348)
Cash and cash equivalents, beginning of period........... 56,426 33,291
--------- --------
Cash and cash equivalents, end of period................. $ 44,101 $ 20,943
========= ========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
3
ISP CHEMCO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (CONTINUED)
QUARTER ENDED
-------------------
APRIL 4, MARCH 30,
2004 2003
--------- ---------
(THOUSANDS)
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized).................. $ 24,967 $ 23,372
Income taxes (including taxes paid pursuant to
the Tax Sharing Agreement)......................... 5,188 3,858
Acquisition of Red Carnation Gums Limited:
Estimated fair market value of assets acquired........ $ 6,938
Purchase price of acquisition......................... 5,226
--------
Liabilities assumed................................... $ 1,712
========
Acquisition of Biochema Schwaben, net of $764
cash acquired:
Estimated fair market value of assets acquired........ $ 14,818
Purchase price of acquisition......................... 13,915
--------
Liabilities assumed................................... $ 903
========
Acquisition of Hallcrest Limited:
Estimated fair market value of assets acquired........ $ 7,651
Purchase price of acquisition......................... 7,125
--------
Liabilities assumed................................... $ 526
========
Supplemental disclosure of financing activities:
Effective April 1, 2004, the Company made a $31.2 million dividend to its
parent company, International Specialty Holdings Inc. In connection with this
dividend, the Company's total long-term loan receivable of $39.0 million from a
related party was reduced by $31.2 million.
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
4
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The consolidated financial statements for ISP Chemco Inc. (the "Company")
reflect, in the opinion of management, all adjustments necessary to present
fairly the financial position of the Company and its consolidated subsidiaries
at April 4, 2004, and the results of operations and cash flows for the quarterly
periods ended April 4, 2004 and March 30, 2003, each period beginning on January
1. All adjustments are of a normal recurring nature. Certain amounts in the 2003
consolidated financial statements have been reclassified to conform to the 2004
presentation. These consolidated financial statements should be read in
conjunction with the annual consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2003 (the "2003 Form 10-K").
NOTE 1. AMENDED AND RESTATED SENIOR CREDIT FACILITIES
On April 2, 2004, the Company and three of its wholly owned subsidiaries
amended and restated its June 2001 $450.0 million senior secured credit
facilities (the "Senior Credit Facilities"). The Senior Credit Facilities
provide a $250.0 million term loan with a maturity in March 2011, which replaces
the $225.0 million term loan that was due to mature in June 2008. In connection
therewith, the Company borrowed an additional $31.2 million to bring the
outstanding balance of the term loan to $250.0 million. The Senior Credit
Facilities reduced the margin-based interest rate for term loan borrowings and
amended financial covenant ratios, including the elimination of the minimum
adjusted net worth covenant.
On April 15, 2004, the $225.0 million revolving credit facility under the
Senior Credit Facilities, which was to terminate in June 2006, was reduced to
$200.0 million, including a borrowing capacity not in excess of $50.0 million
for letters of credit, and the maturity was extended to April 15, 2009. In
addition, the margin-based interest rate for revolving credit borrowings was
reduced.
NOTE 2. ACQUISITIONS
During the first quarter of 2004, the Company completed three acquisitions
in Europe to further enhance the Company's global specialty chemicals business.
In February 2004, the Company acquired the assets and business of UK-based Red
Carnation Gums Limited ("RCG"), a manufacturer of emulsifiers, stabilizers and
gelling systems for food and oral care markets. The purchase price of $5.2
million in cash was allocated on a preliminary basis to the estimated fair value
of the identifiable assets acquired. The results of RCG are included in the
Company's results of operations from the date of acquisition.
On March 9, 2004, the Company acquired the assets and business of
Germany-based Biochema Schwaben, a formulator of preservatives and biocides with
applications in industrial and personal care markets, primarily in printing,
paints and coatings, polymer emulsions, skin care and hair care markets. The
purchase price of $13.9 million in cash, net of $0.8 million cash acquired, was
allocated on a preliminary basis to the estimated fair value of the identifiable
assets acquired. The Company is in the process of evaluating the fair value of
the net assets acquired and, therefore, the purchase price allocation is subject
to refinement. The results of Biochemca
5
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 2. ACQUISITIONS - (CONTINUED)
Schwaben are included in the Company's results of operations from the date of
acquisition.
On March 31, 2004, the Company acquired the assets and business of UK-based
Hallcrest Limited and its U.S. affiliate ("Hallcrest"), a manufacturer and
marketer of custom microencapsulation and liquid crystal technologies for the
personal care, home care, oral care and food industries. The purchase price of
$7.1 million in cash was allocated on a preliminary basis to the estimated fair
value of the identifiable assets acquired, and the excess of $3.9 million was
recorded as goodwill. The Company is in the process of evaluating the fair value
of the net assets acquired and, therefore, the purchase price allocation is
subject to refinement.
NOTE 3. NEW ACCOUNTING STANDARDS
In December 2003, the Financial Accounting Standards Board issued a revised
FASB Interpretation ("FIN") No. 46R, "Consolidation of Variable Interest
Entities," replacing FIN 46 which had originally been issued in January 2003.
FIN No. 46R addresses how a business enterprise should evaluate whether it has a
controlling financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity. The Company will be
required to apply FIN 46R to variable interests in variable interest entities
created after December 31, 2003. The effective dates of FIN 46R for public
enterprises vary based on the type of variable interest entity and whether FIN
46 was applied to a variable interest entity prior to the effective date of FIN
46R. For any variable interest entities that must be consolidated under FIN 46R
that were created before January 1, 2004, the assets, liabilities and
noncontrolling interest of the variable interest entities initially would be
measured at their carrying amounts with any difference between the net amount
added to the balance sheet and any previously recognized interest being
recognized as the cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date FIN 46R first
applies may be used to measure the assets, liabilities and noncontrolling
interest of the variable interest entities. The Company does not currently have
an interest in a variable interest entity. Therefore, FIN 46R will not have an
immediate impact on the Company's consolidated financial statements.
6
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 4. COMPREHENSIVE INCOME
Quarter Ended
---------------------
April 4, March 30,
2004 2003
--------- ----------
(Thousands)
Net income......................................... $ 21,873 $ 12,213
--------- --------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment.......... (985) 1,490
--------- --------
Total other comprehensive income (loss)............ (985) 1,490
--------- --------
Comprehensive income............................... $ 20,888 $ 13,703
========= ========
Changes in the components of accumulated other comprehensive loss for the
quarter ended April 4, 2004 are as follows:
Cumulative Additional
Foreign Minimum Accumulated
Currency Pension Other
Translation Liability Comprehensive
Adjustment Adjustment Loss
----------- ---------- -------------
(Thousands)
Balance, December 31, 2003....... $ 5,382 $ (6,120) $ (738)
Change for the period............ (985) - (985)
---------- --------- ---------
Balance, April 4, 2004........... $ 4,397 $ (6,120) $ (1,723)
========== ========= =========
NOTE 5. INVENTORIES
Inventories comprise the following:
April 4, December 31,
2004 2003
--------- ------------
(Thousands)
Finished goods................ $107,275 $113,227
Work-in-process............... 34,417 36,415
Raw materials and supplies.... 44,544 38,163
-------- --------
Inventories................... $186,236 $187,805
======== ========
7
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 5. INVENTORIES - (CONTINUED)
At April 4, 2004 and December 31, 2003, $66.9 and $62.7 million,
respectively, of domestic inventories were valued using the LIFO method. If the
FIFO inventory method had been used for these inventories, the value of
inventories would have been $7.0 and $4.2 million higher at April 4, 2004 and
December 31, 2003, respectively.
NOTE 6. GOODWILL AND INTANGIBLE ASSETS
The following schedule reconciles the changes in the carrying amount of
goodwill, by business segment, for the quarter ended April 4, 2004.
Specialty Industrial Mineral Total
Chemicals Chemicals Products Goodwill
--------- ---------- -------- ---------
(Thousands)
Balance, December 31, 2003........ $ 279,562 $ - $ 51,539 $ 331,101
Acquisition of Hallcrest Limited.. 3,905 - - 3,905
Translation adjustment............ (62) - - (62)
--------- ---------- --------- ---------
Balance, April 4, 2004............ $ 283,405 $ - $ 51,539 $ 334,944
========= ========== ========= =========
The following is information as of April 4, 2004 and December 31, 2003
related to the Company's acquired intangible assets. Amounts related to
intangible assets acquired in 2004 (see Note 2) and the range of amortizable
lives for those intangible assets are subject to change pending completion of a
valuation of the fair value of the net assets acquired.
April 4, 2004 December 31, 2003
--------------------------- ---------------------------
Amortizable Gross Carrying Accumulated Gross Carrying Accumulated
Lives Amount Amortization Amount Amortization
----------- -------------- ------------ -------------- ------------
(Dollars in Thousands)
Intangible assets subject to amortization:
Patents.................................... 5- 20 years $ 669 $ (127) $ 669 $ (113)
Formulations............................... 5- 10 years 2,802 - - -
Unpatented technology...................... 10-15 years 1,700 - - -
Customer base.............................. 10-15 years 1,786 - - -
Non-compete agreements..................... 2- 5 years 3,419 (1,021) 1,571 (971)
EPA registrations.......................... 5 years 166 (74) 166 (66)
---------- -------- ---------- --------
Total amortizable intangible assets...... 10,542 (1,222) 2,406 (1,150)
---------- -------- ---------- --------
Intangible assets not subject to amortization:
Trademarks................................. 5,401 - 2,962 -
EPA registrations.......................... 4,648 - 4,648 -
---------- -------- ---------- --------
Total unamortized intangible assets...... 10,049 - 7,610 -
---------- -------- ---------- --------
Total intangible assets...................... $ 20,591 $ (1,222) $ 10,016 $ (1,150)
========== ======== ========== ========
Estimated amortization expense:
Year ended December 31, (Thousands)
----------
2004................................................ $ 1,056
2005................................................ 1,313
2006................................................ 1,313
2007................................................ 1,049
2008................................................ 1,049
8
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 7. ASSET RETIREMENT OBLIGATIONS
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 143, "Accounting for Asset Retirement Obligations," effective January 1,
2003. SFAS No. 143 establishes accounting and reporting standards for legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and the normal operation of a
long-lived asset. The Company holds long-lived assets that have legal
obligations associated with their retirement. These assets include deep wells
that require capping, minerals quarries that require reclamation and other plant
assets subject to certain environmental regulations. SFAS No. 143 requires that
the fair value of a liability for an asset retirement obligation ("ARO") be
recognized in the period in which it is incurred. Upon initial recognition of
such liability, an entity must capitalize the asset retirement cost by
increasing the carrying amount of the related long-lived asset and subsequently
depreciating the asset retirement cost over the useful life of the related
asset. Subsequent to the initial measurement of the ARO, the obligation will be
adjusted at the end of each period to reflect the passage of time and changes in
the estimated future cash flows underlying the obligation. If the obligation is
settled for other than the carrying amount of the liability, the Company would
then recognize a gain or loss on settlement. As a result of adopting SFAS No.
143, effective January 1, 2003, the Company recognized an after-tax charge of
$1.0 million ($1.6 million before an income tax benefit of $0.6 million) as the
cumulative effect of a change in accounting principle, and recorded an ARO of
$1.9 million and a net increase in property, plant and equipment of $0.3
million.
NOTE 8. DIVIDEND TO PARENT COMPANY
Effective April 1, 2004, the Company made a dividend of $31.2 million to
its parent company, International Specialty Holdings Inc. In connection with
this dividend, the Company's total long-term loan receivable of $39.0 million
from a related party was reduced by $31.2 million.
NOTE 9. OTHER OPERATING CHARGES
In February 2003, the Company's indirect parent company, International
Specialty Products Inc., completed a going private transaction. As a result, the
Company's stock-based compensation plans were terminated and payments were made
in accordance with the terms of that transaction. Accordingly, holders of
approximately 2.7 million vested, in-the-money stock options outstanding and
exercisable on February 28, 2003 received cash amounts aggregating $1.5 million
that were recorded as compensation expense in the first quarter of 2003.
NOTE 10. BENEFIT PLANS
Defined Benefit Plans
The Company provides a noncontributory defined benefit retirement plan
for certain hourly employees in the United States (the "Hourly Retirement
Plan"). Benefits under this plan are based on stated amounts for each year of
service.
9
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. BENEFIT PLANS - (CONTINUED)
The Company's funding policy is consistent with the minimum funding requirements
of ERISA.
ISP Marl GmbH, a wholly owned German subsidiary of the Company, provides
a noncontributory defined benefit retirement plan for its hourly and salaried
employees (the "ISP Marl Plan"). Benefits under this plan are based on average
earnings over each employee's career with the Company.
The Company's net periodic pension cost for the first quarter of 2004
and 2003 for the Hourly Retirement Plan and the ISP Marl Plan included the
following components:
Hourly Retirement Plan ISP Marl Plan
----------------------- ------------------------
Quarter Ended Quarter Ended
------------------------ -------------------------
April 4, March 30, April 4, March 30,
2004 2003 2004 2003
-------- ---------- -------- --------
(Thousands)
Service cost............................. $ 69 $ 60 $ 23 $ 20
Interest cost............................ 523 525 48 39
Expected return on plan assets........... (736) (716) - -
Amortization of actuarial losses......... 126 98 - -
Amortization of unrecognized prior
service cost........................... 60 69 1 1
------- -------- ------ ------
Net periodic pension cost................ $ 42 $ 36 $ 72 $ 60
======= ======== ====== ======
Postretirement Medical and Life Insurance
The Company generally does not provide postretirement medical and life
insurance benefits, although it subsidizes such benefits for certain employees
and certain retirees.
The net periodic postretirement benefit cost for the first quarter of
2004 and 2003 included the following components:
Quarter Ended
-----------------------
April 4, March 30,
2004 2003
-------- ---------
(Thousands)
Service cost.......................................... $ 26 $ 32
Interest cost......................................... 131 156
Amortization of actuarial losses...................... - 7
Amortization of unrecognized prior service cost....... (71) (71)
------ ------
Net periodic postretirement benefit cost.............. $ 86 $ 124
====== ======
10
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. BUSINESS SEGMENT INFORMATION
Quarter Ended
---------------------
April 4, March 30,
2004 2003
--------- ---------
(Thousands)
Net sales:
Specialty Chemicals..................................... $ 186,169 $ 157,913
Industrial Chemicals.................................... 48,688 49,136
Mineral Products (1).................................... 32,038 25,527
--------- ---------
Net sales................................................. $ 266,895 $ 232,576
========= =========
Operating income:
Specialty Chemicals .................................... $ 46,194 $ 33,243
Industrial Chemicals.................................... 239 (2,728)
Mineral Products........................................ 2,414 3,998
--------- ---------
Total segment operating income.......................... 48,847 34,513
Unallocated corporate office............................ 10 82
--------- --------
Total operating income.................................... 48,857 34,595
Interest expense and other, net........................... (15,295) (14,758)
--------- ---------
Income before income taxes and cumulative effect of
change in accounting principle......................... $ 33,562 $ 19,837
========= =========
(1) Includes sales to Building Materials Corporation of America, an affiliate,
and its subsidiaries, of $24.2 and $19.7 million for the first quarter of
2004 and 2003, respectively.
NOTE 12. GUARANTOR FINANCIAL INFORMATION
In 2001, the Company and three of its wholly owned subsidiaries jointly
issued, in three separate transactions, a total of $405.0 million aggregate
principal amount of 10 1/4% Senior Subordinated Notes due 2011 (the "2011
Notes"). The 2011 Notes are guaranteed by all of the Company's domestic
subsidiaries, other than certain immaterial subsidiaries and the Company's
accounts receivable financing subsidiary. These guarantees are full,
unconditional and joint and several.
ISP Global Technologies Inc., which is a guarantor of the 2011 Notes, is
party to a License and Royalty Agreement with non-guarantor foreign affiliates.
Under this agreement, ISP Global Technologies granted a license to certain
non-guarantor foreign affiliates for the use of the Patent Rights, Know-how and
Trademarks in connection with the manufacture, use and sale of the Company's
products.
Presented below is condensed consolidating financial information for the
Company, the guarantor subsidiaries and the non-guarantor subsidiaries. This
financial information should be read in conjunction with the consolidated
financial statements and other notes related thereto.
11
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 12. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
QUARTER ENDED APRIL 4, 2004
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
Net sales ................................ $ - $ 125,359 $ 141,536 $ - $ 266,895
Intercompany net sales ................... - 60,745 4,335 (65,080) -
--------- ---------- ---------- ---------- ----------
Total net sales ....................... - 186,104 145,871 (65,080) 266,895
--------- ---------- ---------- ---------- ----------
Cost of products sold .................... - (138,778) (95,117) 65,080 (168,815)
Selling, general and administrative ...... - (31,908) (17,243) (49,151)
Amortization of intangible assets......... - (72) - (72)
--------- ---------- ---------- ---------- ----------
Operating income ......................... - 15,346 33,511 - 48,857
Equity in income of subsidiaries.......... 23,026 - - (23,026) -
Intercompany royalty income (expense)..... - 11,084 (11,084) -
Intercompany dividend income ............. - 1,682 - (1,682) -
Interest expense ......................... 815 (15,100) 683 (13,602)
Other expense, net ....................... (1) (805) (887) (1,693)
--------- ---------- ---------- ---------- ----------
Income before income taxes ............... 23,840 12,207 22,223 (24,708) 33,562
Income taxes ............................. (285) (7,724) (3,680) (11,689)
--------- ---------- ---------- ---------- ----------
Net income ............................... $ 23,555 $ 4,483 $ 18,543 $ (24,708) $ 21,873
========= ========== ========== ========== ==========
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
QUARTER ENDED MARCH 30, 2003
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Net sales ................................ $ - $ 107,639 $ 124,937 $ - $ 232,576
Intercompany net sales ................... - 56,687 2,633 (59,320) -
-------- ---------- ---------- ---------- ----------
Total net sales ....................... - 164,326 127,570 (59,320) 232,576
-------- ---------- ---------- ---------- ----------
Cost of products sold .................... - (116,793) (95,120) 59,320 (152,593)
Selling, general and administrative ...... - (28,904) (14,889) (43,793)
Other operating charges................... - (1,376) (75) (1,451)
Amortization of intangible assets ........ - (144) - (144)
-------- ---------- ---------- ---------- ----------
Operating income ......................... - 17,109 17,486 - 34,595
Equity in income of subsidiaries ......... 12,390 - - (12,390) -
Intercompany royalty income (expense)..... - 9,200 (9,200) -
Intercompany dividend income ............. - 733 - (733) -
Interest expense ......................... 857 (14,919) 641 (13,421)
Other expense, net ....................... (2) (1,716) 381 (1,337)
-------- ---------- ---------- ---------- ----------
Income before income taxes and cumulative
effect of change in accounting principle 13,245 10,407 9,308 (13,123) 19,837
Income taxes ............................. (299) (5,369) (935) (6,603)
-------- ---------- ---------- ---------- ----------
Income before cumulative effect of change
in accounting principle................. 12,946 5,038 8,373 (13,123) 13,234
Cumulative effect of change in accounting
principle, net of income tax benefit of
$600 ................................... - (583) (438) (1,021)
-------- ---------- ---------- ---------- ----------
Net income ............................... $ 12,946 $ 4,455 $ 7,935 $ (13,123) $ 12,213
======== ========== ========== ========== ==========
12
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 12. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING BALANCE SHEET
APRIL 4, 2004
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ............. $ 4 $ 25,381 $ 18,716 $ - $ 44,101
Accounts receivable, trade, net ....... - 8,768 107,729 116,497
Accounts receivable, other ............ - 2,965 22,121 25,086
Receivables from related parties....... 183 15,811 (301) 15,693
Inventories ........................... - 105,281 80,955 186,236
Deferred income tax assets............. - 21,420 4,178 25,598
Prepaid expenses ...................... - 4,435 2,193 6,628
-------- ---------- --------- ---------- -----------
Total current assets ................ 187 184,061 235,591 - 419,839
Investment in subsidiaries ............... 358,912 242,812 - (601,724) -
Intercompany loans ....................... 16,021 (7,994) (8,027) -
Due from (to) subsidiaries, net .......... (5,990) 42,731 (36,741) -
Property, plant and equipment, net ....... - 492,779 90,338 583,117
Goodwill ................................. 89,931 239,210 5,803 334,944
Intangible assets, net.................... - 19,085 284 19,369
Long-term receivable from related party .. - - 32,598 32,598
Long-term loan receivable from related
party................................... - 7,760 - 7,760
Other assets ............................. - 60,068 559 60,602
-------- ---------- --------- ---------- -----------
Total Assets ............................. $459,061 $1,280,512 $ 320,405 $ (601,724) $ 1,458,254
======== ========== ========= ========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Short-term debt ....................... $ - $ - $ 71 $ - $ 71
Current maturities of long-term debt .. - 2,721 146 2,867
Accounts payable ...................... - 32,861 31,864 64,265
Accrued liabilities ................... - 49,188 22,202 71,390
Income taxes payable................... 17,754 3,483 8,408 29,645
-------- ---------- --------- ---------- -----------
Total Current liabilities ........... 17,754 88,253 62,231 - 168,238
Long-term debt less current maturities ... - 651,017 484 651,501
Deferred income tax liabilities........... - 114,688 13,864 128,552
Other liabilities ........................ 57,268 67,642 1,014 125,924
Total Shareholder's Equity ............... 384,039 358,912 242,812 (601,724) 384,039
-------- ---------- --------- ---------- -----------
Total Liabilities and Shareholder's
Equity ................................ $459,061 $1,280,512 $ 320,405 $ (601,724) $ 1,458,254
======== ========== ========= ========== ===========
13
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 12. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2003
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ............. $ 5 $ 29,009 $ 27,412 $ - $ 56,426
Accounts receivable, trade, net ....... - 2,807 84,114 86,921
Accounts receivable, other ............ - 3,152 16,529 19,681
Receivables from related parties....... 183 12,795 (470) 12,508
Inventories ........................... - 102,364 85,441 187,805
Deferred income tax assets............. - 21,421 4,280 25,701
Prepaid expenses ...................... - 3,847 1,930 5,777
--------- ---------- --------- ---------- -----------
Total current assets ................ 188 175,395 219,236 - 394,819
Investment in subsidiaries ............... 367,837 223,261 - (591,098) -
Intercompany loans ....................... 16,021 (8,185) (7,836) -
Due from (to) subsidiaries, net .......... - 41,670 (41,670) -
Property, plant and equipment, net ....... - 494,451 86,157 580,608
Goodwill ................................. 89,931 235,775 5,395 331,101
Intangible assets, net ................... - 8,866 - 8,866
Long-term receivable from related party .. - - 32,116 32,116
Long-term loan receivable from related
party................................... - 31,231 - 31,231
Other assets ............................. - 56,912 567 57,479
--------- ---------- --------- ---------- -----------
Total Assets ............................. $ 473,977 $1,259,376 $ 293,965 $ (591,098) $ 1,436,220
========= ========== ========= ========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Short-term debt ....................... $ - $ - $ 68 $ - $ 68
Current maturities of long-term debt .. - 2,715 7 2,722
Accounts payable ...................... - 29,103 25,512 54,615
Accrued liabilities ................... - 67,591 21,432 89,023
Income taxes payable................... 21,350 3,489 8,424 33,263
--------- ---------- --------- ---------- -----------
Total Current liabilities ........... 21,350 102,898 55,443 - 179,691
Long-term debt less current maturities ... - 620,447 26 620,473
Deferred income tax liabilities........... - 103,847 13,972 117,819
Other liabilities ........................ 58,245 64,347 1,263 123,855
Total Shareholder's Equity ............... 394,382 367,837 223,261 (591,098) 394,382
--------- ---------- --------- ---------- -----------
Total Liabilities and Shareholder's
Equity ................................ $ 473,977 $1,259,376 $ 293,965 $ (591,098) $ 1,436,220
========= ========== ========= ========== ===========
14
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 12. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
QUARTER ENDED APRIL 4, 2004
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Consolidated
-------- ------------ ------------ ------------
Cash provided by (used in) operating activities:
Net income (loss)....................................... $ (1,153) $ 4,483 $ 18,543 $ 21,873
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation......................................... - 12,375 3,390 15,765
Amortization of intangible assets.................... - 72 - 72
Deferred income taxes................................ - 7,076 (6) 7,070
(Increase) decrease in working capital items............ 170 (23,415) (14,474) (37,719)
Proceeds from sale of accounts receivable............... - - 2,877 2,877
(Increase) decrease in receivables from related parties - (3,016) (651) (3,667)
Change in amounts due to (from) subsidiaries............ 5,990 (819) (5,171) -
Change in investment in and advances to affiliates...... (4,031) 356 3,675 -
Other, net.............................................. (977) 1,305 (276) 52
-------- ---------- ----------- ---------
Net cash provided by (used in) operating activities....... (1) (1,583) 7,907 6,323
-------- ---------- ----------- ---------
Cash used in investing activities:
Capital expenditures and acquisitions................... - (25,437) (14,785) (40,222)
-------- ---------- ----------- ---------
Net cash used in investing activities..................... - (25,437) (14,785) (40,222)
-------- ---------- ----------- ---------
Cash provided by (used in) financing activities:
Increase in short-term debt............................. - - 3 3
Proceeds from issuance of debt.......................... - 31,188 - 31,188
Repayments of long-term debt............................ - (677) (15) (692)
Increase in loan to related party....................... - (7,760) - (7,760)
Change in net intercompany loans........................ - (191) 191 -
Debt issuance costs..................................... - (850) - (850)
Intercompany dividends.................................. - 1,682 (1,682) -
-------- ---------- ----------- ---------
Net cash provided by (used in) financing activities....... - 23,392 (1,503) 21,889
-------- ---------- ----------- ---------
Effect of exchange rate fluctuations on cash and cash
equivalents............................................. - - (315) (315)
-------- ---------- ----------- ---------
Net change in cash and cash equivalents................... (1) (3,628) (8,696) (12,325)
Cash and cash equivalents, beginning of period............ 5 29,009 27,412 56,426
-------- ---------- ----------- ---------
Cash and cash equivalents, end of period.................. $ 4 $ 25,381 $ 18,716 $ 44,101
======== ========== =========== =========
15
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 12. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
QUARTER ENDED MARCH 30, 2003
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Consolidated
-------- ------------ ------------ ------------
Cash provided by (used in) operating activities:
Net income (loss) ...................................... $ (177) $ 4,455 $ 7,935 $ 12,213
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Cumulative effect of change in accounting principle.. - 583 438 1,021
Depreciation......................................... - 12,015 2,799 14,814
Amortization of intangible assets.................... - 144 - 144
Deferred income taxes................................ - 4,434 (1,866) 2,568
(Increase) decrease in working capital items............ 780 (10,164) (19,594) (28,978)
Proceeds (repayments) from sale of accounts receivable.. - - (1,339) (1,339)
Increase in receivables from related parties............ (216) (5,000) (642) (5,858)
Change in amounts due to (from) subsidiaries............ - (10,948) 10,948 -
Change in investment in and advances to affiliates...... (1,825) (400) 2,225 -
Other, net.............................................. (11) 787 (722) 54
-------- ---------- ----------- ---------
Net cash provided by (used in) operating activities....... (1,449) (4,094) 182 (5,361)
-------- ---------- ----------- ---------
Cash used in investing activities:
Capital expenditures.................................... - (7,698) (1,957) (9,655)
-------- ---------- ----------- ---------
Net cash used in investing activities..................... - (7,698) (1,957) (9,655)
-------- ---------- ----------- ---------
Cash provided by (used in) financing activities:
Decrease in short-term debt............................. - - (79) (79)
Repayments of long-term debt............................ - (128) - (128)
Intercompany dividends.................................. - 733 (733) -
Capital contribution from parent company................ 1,451 - - 1,451
-------- ---------- ----------- ---------
Net cash provided by (used in) financing activities....... 1,451 605 (812) 1,244
-------- ---------- ----------- ---------
Effect of exchange rate fluctuations on cash and cash
equivalents............................................. - - 1,424 1,424
-------- ---------- ----------- ---------
Net change in cash and cash equivalents................... 2 (11,187) (1,163) (12,348)
Cash and cash equivalents, beginning of period............ 6 17,735 15,550 33,291
-------- ---------- ----------- ---------
Cash and cash equivalents, end of period.................. $ 8 $ 6,548 $ 14,387 $ 20,943
======== ========== =========== =========
16
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 13. CONTINGENCIES
For information regarding contingencies, reference is made to Note 22 to
consolidated financial statements contained in the 2003 Form 10-K.
Environmental Litigation
The Company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters ("Environmental
Claims") under the Comprehensive Environmental Response Compensation and
Liability Act, Resource Conservation and Recovery Act and similar state laws, in
which recovery is sought for the cost of cleanup of contaminated sites or
remedial obligations are imposed. A number of these Environmental Claims are in
the early stages or have been dormant for protracted periods.
While the Company cannot predict whether adverse decisions or events can
occur in the future, in the opinion of the Company's management, the resolution
of the Environmental Claims should not be material to the business, liquidity,
results of operations, cash flows or financial position of the Company. However,
adverse decisions or events, particularly as to increases in remedial costs,
discovery of new contamination, assertion of natural resource damages, plans for
development of the Company's Linden, New Jersey property, and the liability and
the financial responsibility of the Company's insurers and of the other parties
involved at each site and their insurers, could cause the Company to increase
its estimate of its liability or decrease its estimate of insurance recoveries
in respect of those matters. It is not currently possible to estimate the amount
or range of any additional liability.
Tax Claim Against G-I Holdings Inc.
The predecessor of ISP and certain of its domestic subsidiaries were
parties to tax sharing agreements with members of a consolidated group for
Federal income tax purposes that included G-I Holdings Inc., (the "G-I Holdings
Group") in certain prior years. Until January 1, 1997, ISP and its domestic
subsidiaries were included in the consolidated Federal income tax returns of the
G-I Holdings Group and, accordingly, would be severally liable for any tax
liability of the G-I Holdings Group in respect of those prior years. Those tax
sharing agreements are no longer applicable with respect to the tax liabilities
of ISP for periods subsequent to January 1, 1997, because neither the Company
nor any of its domestic subsidiaries are members of the G-I Holdings Group for
periods after January 1, 1997. In January 2001, G-I Holdings filed a voluntary
petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code due to
its asbestos-related bodily injury claims relating to the inhalation of asbestos
fiber.
On September 15, 1997, G-I Holdings received a notice from the Internal
Revenue Service ("IRS") of a deficiency in the amount of $84.4 million (after
taking into account the use of net operating losses and foreign tax credits
otherwise available for use in later years) in connection with the formation in
1990 of Rhone-Poulenc Surfactants and Specialties, L.P. (the "surfactants
partnership"), a partnership in which G-I Holdings held an interest. On
September 21, 2001, the IRS filed a proof of claim with respect to such
deficiency in the G-I Holdings bankruptcy against G-I Holdings and ACI Inc., a
subsidiary of G-I Holdings which also held an interest in the surfactants
partnership and also has
17
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 13. CONTINGENCIES - (CONTINUED)
filed a voluntary petition for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. If the proof of claim is sustained, ISP and/or certain of its
subsidiaries together with G-I Holdings and several current and former
subsidiaries of G-I Holdings would be severally liable for taxes and interest in
the amount of approximately $285 million, computed as of April 4, 2004. On May
7, 2002, G-I Holdings, together with ACI Inc., filed an objection to the proof
of claim, which objection will be heard by the United States District Court for
the District of New Jersey overseeing the G-I Holdings bankruptcy. G-I Holdings
has advised the Company that it believes that it will prevail in this tax matter
involving the surfactants partnership, although there can be no assurance in
this regard. The Company believes that the ultimate disposition of this matter
will not have a material adverse effect on its business, financial position or
results of operations. For additional information relating to G-I Holdings,
reference is made to Notes 8 and 22 to consolidated financial statements
contained in the 2003 Form 10-K.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Unless otherwise indicated by the context, "we," "us" and "our" refer to
ISP Chemco Inc. and its consolidated subsidiaries.
CRITICAL ACCOUNTING POLICIES
There have been no significant changes in our critical accounting
policies during the first quarter of 2004. For a discussion of our critical
accounting policies, reference is made to the "- Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
RESULTS OF OPERATIONS - FIRST QUARTER 2004 COMPARED WITH
FIRST QUARTER 2003
Overview
We recorded net income of $21.9 million for the first quarter of 2004
compared with net income of $12.2 million in the first quarter of 2003. The
improved results for the first quarter of 2004 were attributable to
significantly higher operating income. First quarter 2003 results included a
$1.0 million after-tax charge for the cumulative effect of a change in
accounting principle from the adoption of Statement of Financial Accounting
Standards, which we refer to as "SFAS," No. 143, "Accounting for Asset
Retirement Obligations."
Net Sales. Net sales by business segment for the first quarter of 2004 and
2003 were:
Quarter Ended
-----------------------------
April 4, March 30,
2004 2003
--------- ----------
(Millions)
Specialty chemicals.................... $ 186.2 $ 157.9
Industrial chemicals................... 48.7 49.2
Mineral products....................... 32.0 25.5
--------- ---------
Net sales............................ $ 266.9 $ 232.6
========= =========
Net sales for the first quarter of 2004 were $266.9 million compared
with $232.6 million in the first quarter of 2003. The $34.3 million (15%)
increase in sales resulted primarily from higher unit volumes in all product
lines of the specialty chemicals segment (totaling $19.3 million) and in the
mineral products segment ($7.4 million), partially offset by lower volumes in
the industrial chemicals segment ($3.6 million). The favorable impact of the
weaker U.S. dollar ($13.9 million), primarily in Europe, also benefited sales.
Gross Margin. Our gross margin in the first quarter of 2004 was 36.7%
compared with 34.4% in the first quarter of 2003. The gross margin for the
specialty chemicals segment increased to 45.4% in the first quarter of 2004 from
43.9% in the same period of 2003 as a result of the favorable impact of
19
higher volumes and the weaker U.S. dollar, partially offset by higher
manufacturing costs ($4.4 million). The overall improved margin was adversely
impacted by a lower margin for the mineral products segment, which decreased to
21.3% from 27.2% in the first quarter of 2003 as a result of unfavorable pricing
in connection with a long-term customer supply contract entered into in the
second quarter of 2003.
Selling, General and Administrative. Selling, general and administrative
expenses increased 12% in the first quarter of 2004 to $49.2 million from $43.8
million in the first quarter of 2003, however, as a percent of sales, decreased
to 18.4% from 18.8% in the first quarter of 2003. The increase in selling,
general and administrative expenses in the first quarter of 2004 related
primarily to higher selling and distribution costs as a result of the higher
sales levels.
Other operating charges. Other operating charges of $1.5 million in the
first quarter of 2003 represented a charge for compensation expense for stock
option payments related to ISP's going private transaction in February 2003.
Operating Income. Operating income by business segment for the first
quarter of 2004 and 2003 was:
Quarter Ended
-----------------------------
April 4, March 30,
2004 2003
--------- ----------
(Millions)
Specialty chemicals.................... $ 46.2 $ 33.2
Industrial chemicals................... 0.3 (2.7)
Mineral products....................... 2.4 4.0
--------- ---------
Total segment operating income....... 48.9 34.5
Unallocated corporate office items..... - 0.1
--------- ---------
Operating income..................... $ 48.9 $ 34.6
========= =========
Operating income for the first quarter of 2004 was $48.9 million
compared with $34.6 million in the first quarter of 2003. Excluding the other
operating charges discussed above, operating income increased 35% to $48.9
million from $36.1 million in the first quarter of 2003 (see "Non-GAAP Financial
Measures" below).
Operating income for the specialty chemicals segment was $46.2 million for
the first quarter of 2004 compared with $33.2 million in the first quarter of
2003. On a comparable basis, excluding the aforementioned charges pertaining to
specialty chemicals, operating income for the segment improved 35% to $46.2
million compared with $34.3 million in the first quarter of 2003. The improved
results were primarily attributable to the personal care, performance chemicals,
pharmaceutical and beverage product lines (up a combined $12.6 million), mainly
due to the favorable effect of higher unit volumes partially offset by higher
manufacturing costs. Operating income for the specialty chemicals segment in the
first quarter of 2004 was also favorably impacted by the weaker U.S. dollar.
The industrial chemicals segment recorded operating income of $0.3 million
in the first quarter of 2004. Excluding the aforementioned other operating
charges in the first quarter of 2003 pertaining to industrial chemicals, the
operating loss in the first quarter of 2003 was $2.5 million. The improved
results were attributable to an improved product mix and manufacturing
efficiencies.
20
Operating income for the mineral products segment was $2.4 million in the
first quarter of 2004. On a comparable basis, excluding other operating charges
in the first quarter of 2003 pertaining to mineral products, operating income
was $4.2 million for the first quarter of 2003. The decline in operating income
from the first quarter of 2003 was primarily due to higher operating expenses
and lower pricing in connection with a long-term customer supply contract
entered into in the second quarter of 2003.
Interest Expense. Interest expense for the first quarter of 2004 was
$13.6 million compared with $13.4 million in the same period in 2003. The slight
increase in interest expense was attributable to higher average interest rates
($0.4 million impact), offset by lower average borrowings.
Other Expense, net. Other expense, net, comprises foreign exchange
gains/losses resulting from the revaluation of foreign currency-denominated
accounts receivable and payable as a result of changes in exchange rates, and
other nonoperating items of expense. Other expense, net, was $1.7 million in the
first quarter of 2004 compared with $1.3 million in the first quarter of 2003.
The higher expense in the first quarter of 2004 was due to unfavorable foreign
exchange.
Income Taxes. In the first quarter of 2004, we recorded a provision for
income taxes of $11.7 million. Our effective tax rate for the first quarter of
2004 was 34.8%, relatively consistent with an effective tax rate of 33.3% in the
first quarter of 2003.
Business Segment Review
A discussion of operating results for each of our business segments
follows. We operate our business through three reportable business segments:
specialty chemicals; industrial chemicals; and mineral products. The operating
income for the first quarter of 2003 for each business segment discussed below
is adjusted for the non-GAAP financial measures in the table below.
Non-GAAP Financial Measures
The business segment review below and the discussion of operating
income above contain information regarding non-GAAP financial measures contained
within the meaning of Item 10 of Regulation S-K promulgated by the Securities
and Exchange Commission. As used herein, "GAAP" refers to accounting principles
generally accepted in the United States of America. We use non-GAAP financial
measures to eliminate the effect of certain other operating gains and charges on
reported operating income. Management believes that these financial measures are
useful to bondholders and financial institutions because such measures exclude
transactions that are unusual due to their nature or infrequency and therefore
allow bondholders and financial institutions to more readily compare our
company's performance from period to period. Management uses this information in
monitoring and evaluating our company's performance and the performance of
individual business segments. The non-GAAP financial measures included herein
have been reconciled to the most directly comparable GAAP financial measure as
is required under Item 10 of Regulation S-K regarding the use of such financial
measures. These non-GAAP financial measures should be considered in addition to,
and not as a substitute, or superior to, operating income or other measures of
financial performance in accordance with accounting principles generally
accepted in the United States of America.
21
First Quarter
----------------------
2004 2003
--------- ---------
(Millions)
Reconciliation of non-GAAP financial measures:
Operating income per GAAP............................... $ 48.9 $ 34.6
Non-GAAP adjustments:
Less: Other operating charge(1).................... - 1.5
--------- ---------
Operating income as adjusted............................ $ 48.9 $ 36.1
========= =========
Supplemental Business Segment Information:
Operating income:
Operating Income per GAAP - Specialty Chemicals.... $ 46.2 $ 33.2
Non-GAAP adjustments (1)........................... - 1.1
--------- ---------
Operating Income - Specialty Chemicals as adjusted. $ 46.2 $ 34.3
========= =========
Operating Income per GAAP - Industrial Chemicals... $ 0.3 $ (2.7)
Non-GAAP adjustments (1)........................... - 0.2
--------- ---------
Operating Income - Industrial Chemicals as adjusted $ 0.3 $ (2.5)
========= =========
Operating Income per GAAP - Mineral Products....... $ 2.4 $ 4.0
Non-GAAP adjustments (1)........................... - 0.2
--------- ---------
Operating Income - Mineral Products as adjusted.... $ 2.4 $ 4.2
========= =========
Total segment operating income as adjusted........... $ 48.9 $ 36.0
Unallocated corporate office per GAAP................ - 0.1
--------- ---------
Operating income as adjusted....................... $ 48.9 $ 36.1
========= =========
(1) Non-GAAP adjustments in the first quarter of 2003 represent an other
operating charge of $1.5 million for stock option payments related to
ISP's
going private transaction, which is also presented by business segment.
Specialty Chemicals
Sales in the first quarter of 2004 were $186.2 million compared with $157.9
million for the same period in 2003. The 18% increase in sales was attributable
to higher unit volumes in all product lines (totaling $19.3 million). The
personal care product line experienced strong volume growth in each of its hair
care, skin care and oral care markets in all regions. In the food and
performance chemicals product lines, new acquisitions (see "-Liquidity and
Financial Condition" below), including Germinal S.A., which was acquired in the
second quarter of 2003, contributed $3.2 million to sales in the first quarter
of 2004. The favorable impact of the weaker U.S. dollar ($10.5 million),
primarily in Europe, also benefited sales.
Operating income for the specialty chemicals segment was $46.2 million for
the first quarter of 2004 compared with $33.2 million in the first quarter of
2003. On a comparable basis, excluding the aforementioned charges pertaining to
specialty chemicals, operating income for the segment improved 35% to $46.2
million compared with $34.3 million in the first quarter of 2003. The improved
results were primarily attributable to the personal care, performance chemicals,
pharmaceutical and beverage product lines (up a
22
combined $12.6 million) and were due to the favorable effect of higher unit
volumes ($10.5 million), partially offset by higher manufacturing costs ($4.4
million) and increased operating expenses ($1.7 million) due to higher selling
and distribution costs resulting from the higher sales levels. Operating income
for the specialty chemicals segment in the first quarter of 2004 was also
favorably impacted by the weaker U.S. dollar ($9.1 million).
Industrial Chemicals
Sales in the first quarter of 2004 were $48.7 million compared with
$49.2 million in the first quarter of 2003. The decrease in sales was
attributable to lower unit volumes ($3.6 million), offset by the favorable
effect of the weaker U.S. dollar ($3.4 million) and slightly unfavorable
pricing.
The industrial chemicals segment recorded operating income of $0.3 million
in the first quarter of 2004. Excluding the aforementioned other operating
charges in the first quarter of 2003 pertaining to industrial chemicals, the
operating loss in the first quarter of 2003 was $2.5 million. The improved
results were attributable to an improved product mix and lower energy costs
(totaling $4.2 million), partially offset by the adverse impact of the stronger
Euro on European-based manufacturing costs ($1.2 million).
Mineral Products
Sales for the Mineral Products segment for the first quarter of 2004
were $32.0 million compared with $25.5 million for the first quarter of 2003.
The 25% increase was due to higher unit volumes ($7.4 million) and included $2.0
million (35%) higher third party sales and $4.5 million (23%) higher sales to
Building Materials Corporation of America, which we refer to as "BMCA," an
affiliate. Partially offsetting the volume increases was lower pricing ($0.9
million) in connection with a long-term supply contract with BMCA that was
entered into in the second quarter of 2003.
Operating income for the mineral products segment was $2.4 million in the
first quarter of 2004. On a comparable basis, excluding other operating charges
in the first quarter of 2003 pertaining to mineral products, operating income
was $4.2 million for the first quarter of 2003. The decline from the first
quarter of 2003 was primarily due to higher operating expenses as a result of
increased freight expense and due to the lower pricing discussed above.
LIQUIDITY AND FINANCIAL CONDITION
Cash Flows and Cash Position
During the first quarter of 2004, our net cash outflow before financing
activities was $33.9 million, including $6.3 million of cash generated from
operations offset by the reinvestment of $40.2 million for capital programs and
acquisitions.
Operating Activities. Net cash generated from operating activities totaled
$6.3 million for the first quarter of 2004 and included a cash investment of
$37.7 million in additional working capital, including a $32.2 million increase
in receivables as a result of higher sales and a $10.4 million net decrease in
payables and accrued liabilities, mainly due to
23
payments of accrued interest, partially offset by a $5.6 million decrease in
inventories. Operating activities also included a $3.7 million cash outflow from
related party transactions, principally due to increased receivables from BMCA
resulting from increased sales of mineral products to BMCA.
Investing Activities. Net cash used in investing activities in the first
quarter of 2004 totaled $40.2 million, including $26.3 million for acquisitions.
Capital expenditures in the first quarter of 2004 were $14.0 million compared
with $9.7 million in the first quarter of 2003.
During the first quarter of 2004, we completed three acquisitions in Europe
to further enhance our global specialty chemicals business. In February 2004, we
acquired the assets and business of UK-based Red Carnation Gums Limited ("RCG"),
a manufacturer of emulsifiers, stabilizers and gelling systems for food and oral
care markets. The purchase price was $5.2 million in cash.
On March 9, 2004, we acquired the assets and business of Germany-based
Biochema Schwaben, a formulator of preservatives and biocides with applications
in industrial and personal care markets, primarily in printing, paints and
coatings, polymer emulsions, skin care and hair care markets. The purchase price
was $13.9 million in cash, net of $0.8 million cash acquired.
On March 31, 2004, we acquired the assets and business of UK-based
Hallcrest Limited and its U.S. affiliate ("Hallcrest"), a manufacturer and
marketer of custom microencapsulation and liquid crystal technologies for the
personal care, home care, oral care and food industries. The purchase price was
$7.1 million in cash.
Financing Activities. Net cash provided by financing activities in the
first quarter of 2004 totaled $21.9 million and included $31.2 million from a
refinancing of our senior secured credit facilities, partially offset by an
increase of $7.8 million in a loan to a related party. Also, effective April 1,
2004, we made a dividend of $31.2 million to our parent company, International
Specialty Holdings Inc. In connection with this dividend, our total long-term
loan receivable of $39.0 million from a related party was reduced by $31.2
million.
On April 2, 2004, we and three of our wholly owned subsidiaries amended and
restated our June 2001 $450.0 million senior secured credit facilities, which we
refer to as the "Senior Credit Facilities" in order to extend the term, increase
future flexibility and reduce the effective interest rate on borrowings. The
Senior Credit Facilities provide a $250.0 million term loan with a maturity in
March 2011, which replaces the $225.0 million term loan that was due to mature
in June 2008. In connection therewith, we borrowed an additional $31.2 million
to bring the outstanding balance of the term loan to $250.0 million. The Senior
Credit Facilities reduced the margin-based interest rate for term loan
borrowings and amended financial covenant ratios, including the elimination of
the minimum adjusted net worth covenant.
On April 15, 2004, the $225.0 million revolving credit facility under the
Senior Credit Facilities, which was to terminate in June 2006, was reduced to
$200.0 million, including a borrowing capacity not in excess of $50.0 million
for letters of credit, and the maturity was extended to April 15, 2009. In
addition, the margin-based interest rate for revolving credit borrowings was
reduced.
24
As a result of the foregoing factors, cash and cash equivalents decreased
by $12.3 million during the first quarter of 2004 to $44.1 million.
Current Maturities of Long-Term Debt
As of April 4, 2004, our current maturities of long-term debt, scheduled to
be repaid during the twelve month period ended March 2005, totaled $2.9 million,
including $2.3 million related to the term loan under the Senior Credit
Facilities.
Operating Lease Obligation
We entered into an operating lease in 1998 for an equipment sale-leaseback
transaction related to equipment at our Freetown, Massachusetts facility. The
lease had an initial term of four years and, at our option, up to three one-year
renewal periods. The first two annual renewal options were exercised during 2002
and 2003, and the third and final renewal option was exercised during the first
quarter of 2004. The lease provides for a substantial guaranteed payment by us,
adjusted at the end of each renewal period, and includes purchase and return
options at fair market values determined at the inception of the lease. We have
the right to exercise a purchase option with respect to the leased equipment, or
the equipment can be returned to the lessor and sold to a third party. It is our
current intention to maintain the Freetown plant and business and we will be
evaluating financing alternatives in that regard. If we exercise the purchase
option in 2005, we will then be obligated to pay a fixed purchase price of $33.6
million.
As part of our acquisition of the Freetown facility in 1998, we entered
into a multi-year agreement to supply the imaging dyes and polymers used by
Polaroid in its instant film business. In October 2001, Polaroid filed for
protection under Chapter 11 of the U.S. Bankruptcy Code. In the third quarter of
2002, the majority of Polaroid's assets were acquired by a new owner, and the
new owner did not assume our long-term supply contract with Polaroid. These
events negatively impacted the sale of our fine chemicals products and reduced
the utilization of our Freetown plant. We have since increased the utilization
of the Freetown facility, primarily from additional production of personal care
products. We also continue to shift specialty chemicals production to our
Columbus, Ohio fine chemicals facility, which currently has excess capacity.
Contractual Obligations
A contract with a multinational supplier to supply a substantial amount of
our acetylene needs to our Texas City, Texas facility expired in March 2004. As
a result, we reduced our acetylene requirements at the Texas City plant by 50%
through shifting production of acetylene-consuming products to our Calvert City,
Kentucky plant. We also entered into a long-term supply contract for the
remaining Texas City plant requirements with a local producer. Under this
contract, we are obligated to purchase specified quantities of acetylene through
the end of 2013. Pricing under this contract is on a fixed basis with escalators
related to changes in the Producer Price Index.
We also have an acetylene supply contract for our requirements of acetylene
delivery via pipeline to our Calvert City facility. The current term of this
contract expires December 31, 2009 and allows us, at our sole option,
25
to extend the agreement for two additional terms of five years each. We are
required by the contract to pay a monthly non-cancelable facility fee. Pricing
under the contract is on a fixed basis with escalators related to changes in the
Producer Price Index.
The annual unconditional purchase obligation related to the long-term
acetylene supply contract at the Texas City plant, together with the
non-cancelable facility fee associated with the Calvert City plant acetylene
contract is $5.1 million.
Contingencies
See Note 13 to consolidated financial statements for information regarding
contingencies.
New Accounting Standards
In December 2003, the Financial Accounting Standards Board issued a revised
FASB Interpretation No. 46R, which we refer to as "FIN 46R," "Consolidation of
Variable Interest Entities," replacing FIN 46 which had originally been issued
in January 2003. FIN 46R addresses how a business enterprise should evaluate
whether it has a controlling financial interest in an entity through means other
than voting rights and accordingly should consolidate the entity. We will be
required to apply FIN 46R to variable interests in variable interest entities
created after December 31, 2003. The effective dates of FIN 46R for public
enterprises vary based on the type of variable interest entity and whether FIN
46 was applied to a variable interest entity prior to the effective date of FIN
46R. For any variable interest entities that must be consolidated under FIN 46R
that were created before January 1, 2004, the assets, liabilities and
noncontrolling interest of the variable interest entities initially would be
measured at their carrying amounts with any difference between the net amount
added to the balance sheet and any previously recognized interest being
recognized as the cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date FIN 46R first
applies may be used to measure the assets, liabilities and noncontrolling
interest of the variable interest entities. Our company does not currently have
an interest in a variable interest entity. Therefore, FIN 46R will not have an
immediate impact on our consolidated financial statements.
* * *
Forward-looking Statements
This Quarterly Report on Form 10-Q contains both historical and
forward-looking statements. All statements other than statements of historical
fact are, or may be deemed to be, forward-looking statements within the meaning
of section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are only predictions and
generally can be identified by use of statements that include phrases such as
"believe", "expect", "anticipate", "intend", "plan", "foresee" or other words or
phrases of similar import. Similarly, statements that describe our objectives,
plans or goals also are forward-looking statements. Our operations are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those contemplated by the relevant forward-looking statement.
The forward-looking statements included herein are made only as
26
of the date of this Quarterly Report on Form 10-Q and we undertake no obligation
to publicly update such forward-looking statements to reflect subsequent events
or circumstances. No assurances can be given that projected results or events
will be achieved.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2003, for a discussion of "Market-Sensitive
Instruments and Risk Management." At December 31, 2003 and April 4, 2004, there
were no equity-related financial instruments employed by us to reduce market
risk.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures: Our management, with the
participation of the Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this report. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of such period, our disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely basis, information
required to be disclosed by us in the reports filed, furnished or submitted
under the Exchange Act.
Internal Control Over Financial Reporting: There have not been any
changes in our internal control over financial reporting during the fiscal
quarter to which this report relates that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
27
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Number
--------------
4.1 Supplemental Indenture dated as of April 2, 2004 to Indenture,
dated as of June 27, 2001, between ISP Chemco Inc., ISP
Chemicals Inc., ISP Minerals Inc. and ISP Technologies Inc.,
as issuers, the subsidiary guarantors party thereto, and
Wilmington Trust Company, as trustee.
10.1 Amendment No. 6 to the Amended and Restated Management
Agreement dated as of January 1, 2004, by and among G-I
Holdings Inc., Merick Inc., International Specialty Products
Inc., International Specialty Holdings Inc., ISP Synthetic
Elastomers LP, ISP Investco LLC, GAF Broadcasting Company,
Inc., Building Materials Corporation of America and ISP
Management Company, Inc., as assignee of ISP Chemco Inc.
(incorporated by reference to Exhibit 10.1 to International
Specialty Holdings Inc.'s Form 10-Q for the quarterly period
ended April 4, 2004).
10.2 Amended and Restated Credit Agreement, dated as of April 2,
2004, between ISP Chemco Inc., ISP Chemicals Inc., ISP
Minerals Inc. and ISP Technologies Inc., as borrowers, the
subsidiary guarantors party thereto, the lenders party
thereto, JP MorganChase Bank, as administrative agent, J.P.
Morgan Securities Inc., as advisor, lead arranger and
bookrunner, Bear Stearns Corporate Lending Inc. and UBS
Warburg LLC, as co-syndication agents, and Deutsche Bank Alex.
Brown Inc. and The Bank of Nova Scotia, as co-documentation
agents ("Credit Agreement").
10.3 Letter Agreement dated as of April 15, 2004 to the Credit
Agreement by and among ISP Chemco Inc., ISP Chemicals Inc.,
ISP Minerals Inc. and ISP Technologies Inc., as borrowers, the
subsidiary guarantors party thereto, the lenders party thereto
and JP MorganChase Bank, as administrative agent.
10.4 Amendment No. 1 dated as of April 2, 2004 to the Pledge and
Security Agreement, dated as of June 27, 2001, among ISP
Chemco Inc., ISP Chemicals Inc., ISP Minerals Inc. and ISP
Technologies Inc., as borrowers, the subsidiary guarantors
party thereto and JP MorganChase Bank, as administrative agent
for the Lenders and the LC Bank under (and as defined in) the
Credit Agreement.
31.1 Rule 13a-14(a)/Rule 15d-14(a) Certification of the Chief
Executive Officer.
31.2 Rule 13a-14(a)/Rule 15d-14(a) Certification of the Chief
Financial Officer.
28
32.1 Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C.Section 1350.
(b) Reports on Form 8-K filed during the current quarter:
No reports on Form 8-K were filed during the three-month period ended
April 4, 2004.
29
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ISP CHEMCO INC.
ISP CHEMICALS INC.
ISP MINERALS INC.
ISP TECHNOLOGIES INC.
DATE: May 18, 2004 BY: /s/ Neal E. Murphy
------------ ------------------
Neal E. Murphy
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
DATE: May 18, 2004 BY: /s/Kenneth M. McHugh
------------ --------------------
Kenneth M. McHugh
Vice President and Controller
(Principal Accounting Officer)
30